By Lynn Thomasson and Michael Tsang
July 27 (Bloomberg) -- Analysts are raising U.S. profit estimates for the first time since credit markets froze two years ago, reducing valuations even after the steepest rally since the Great Depression.
Wall Street firms raised forecasts on Standard & Poor’s 500 Index companies 896 times in June and lowered 886, according to data compiled by JPMorgan Chase & Co. The last time analysts were bullish on a net basis was in April 2007, before more than $1.5 trillion of bank losses tied to subprime loans spurred the first global recession since World War II, the data show.
The failure to anticipate Goldman Sachs Group Inc.’s record second-quarter profits or Freeport-McMoRan Copper & Gold Inc.’s tripling of bullion sales forced analysts to boost 2010 projections. Wall Street firms estimate the S&P 500 will earn $74.55 a share next year, up from $72.54 in May. Stocks now trade at 13.13 times estimated profit, indicating a 26 percent increase in the S&P 500 should the index return to its five- decade average of 16.54 times annual income.
“There’s a sea change of opinion and it all goes back to the improving economic data,” said Fritz Meyer, the Denver- based senior market strategist for Invesco Aim, which oversees $348 billion. “Expectations got pushed too low in the depths of the recessionary mentality. That translates into upward revisions in earnings estimates and drives stock prices.”
Earnings Revisions
Analysts lowered profit forecasts at a record pace after the failure of Lehman Brothers Holdings Inc. in September caused overnight borrowing costs for banks to hit an all-time high of 6.88 percent, tipped the U.S. economy into the worst recession in half a century and sent the S&P 500 to a 38 percent decline, the biggest annual retreat since 1937.
Four out of five of the 4,716 earnings revisions in October were decreases, the most ever, JPMorgan data show. Analysts have raised estimates amid growing signs that the global economy has bottomed.
The turnaround in June from October was the biggest since the JPMorgan data started in 2000. The second-largest swing was in October 2002, the beginning of a five-year bull market that doubled the value of U.S. equities.
Futures on the S&P 500 rose 0.2 percent as of 2:18 a.m. New York time. The gauge rose 4.1 percent to 979.26 last week and has rallied 45 percent since falling to a 12-year low on March 9, pushing its price-earnings ratio to 13.13 based on 2010 estimates. The measure would have to rise to 1,233.06 for the multiple to equal its historic average since 1959, according to data compiled by Bloomberg.
‘Quick Snapshot’
The estimates indicate S&P 500 corporate earnings will rise 25 percent from this year’s projected $59.80 a share, which would be the biggest increase since 1995, the data show.
Revisions are a “really quick snapshot of whether people are becoming more or less optimistic,” said Jack Caffrey, an equity strategist at JPMorgan Private Bank, which oversees $380 billion in New York. “We expect the world to get better, so we wouldn’t be surprised to see stocks move higher.”
Second-quarter earnings announcements indicate analysts may need to change even faster. Of the 204 companies in the S&P 500 that have reported results, 75 percent have beaten consensus estimates, data compiled by Bloomberg show. No more than 72.3 percent have ever beaten analysts’ estimates for a full quarter since at least 1993, the data show.
Equity analysts remained too bullish last year as the economy shrank 6.3 percent in the fourth quarter and 5.5 percent in the first three months of 2009, the biggest six-month contraction since 1958.
Cost Cuts
Forecasters predicted fourth-quarter profit would fall 19.7 percent on Jan. 9, according to consensus estimates compiled three days before the earnings season began. Instead, earnings plummeted 61 percent, the biggest decline since at least 1998, according to data compiled by Bloomberg.
Analysts are being deceived by second-quarter results that were boosted by cost reductions, according to Christopher Sheldon, the Boston-based director of investment strategy at BNY Mellon Wealth Management, which oversees $142 billion globally. Only half of the S&P 500 companies that reported exceeded forecasts for sales, data compiled by Bloomberg show.
“When you look at bottom-up estimates, we would say that’s going to be dependent on a lot of things continuing to go right,” Sheldon said. “As we’ve moved away from the worst-case scenario, people have embraced this idea of a V-shaped recovery, and to us that’s a challenge.”
Invesco Aim’s Meyer says it is “perfectly reasonable” for stocks to rise as much as 25 percent through next year because the economic recovery will boost profits.
‘Grow Into Sequoias’
Economists doubled projections for third-quarter economic growth to 1 percent in July from 0.5 percent in June, according to a Bloomberg survey of 57 analysts this month.
Housing starts unexpectedly rose in June as construction of single-family dwellings jumped the most since 2004, while industrial production shrank less than forecast, reports from the Commerce Department and Federal Reserve in Washington showed. Smaller job losses also helped lift the Conference Board’s index of leading economic indicators to a third monthly advance, the longest streak in five years.
“We’ll rally on signs those little green shoots are starting to grow into sequoias,” said Randy Bateman, the Columbus, Ohio-based chief investment officer at the asset management unit of Huntington Bancshares, which oversees $12 billion. “The revisions in analyst estimates are a manifestation of those green shoots.”
Bateman said he expects the S&P 500 to gain at least 10 percent this year and is “overweight” energy, mining and technology stocks.
Freeport, Goldman
Analysts boosted their 2010 estimates for Freeport by 11 percent to $4.11 a share after the operator of the world’s largest gold mine surpassed second-quarter earnings projections by 90 percent last week, on faster bullion sales and copper production costs that fell 35 percent.
The per-share estimate has increased 138 percent since falling to a low of $1.73 in January. Freeport, which has risen 145 percent this year, trades at 14.55 times next year’s profit forecast based on last week’s closing share price of $59.82. That’s 40 percent less than its 2009 valuation of 24.31 times, data compiled by Bloomberg show.
Estimates for Goldman Sachs’s 2010 profit have risen to $16.19 a share, almost triple the low of $5.90 in March. The New York-based bank trades at 10.17 times next year’s projection. That’s a 63 percent discount to its multiple of 27.73 using earnings from the past 12 months, even after the stock rose 95 percent this year.
Asian Demand
Intel Corp., the world’s largest maker of semiconductors, reported a second-quarter profit on July 14 that was double what analysts projected as personal computer demand improves in Asia. The Santa Clara, California-based company also made a third- quarter sales forecast that topped consensus estimates.
That caused analysts to raise their 2010 earnings estimates for Intel to $1.08 a share, a 21 percent increase. Its shares reached a 10-month high last week and have surged 32 percent this year. Intel trades at 17.93 times next year’s profit, 36 percent less than the decade average of 28.13.
“There are a lot of situations where folks have just dialed expectations to the floor, and that’s just wrong,” said Brian Barish, president of Denver-based Cambiar Investors, which manages $4.5 billion and boosted its stake in Intel earlier this year. “The fundamentals, on balance, are moving in your favor, and there are still a lot of people out there that don’t believe that. There’s still some money to be made.”
To contact the reporters on this story: Lynn Thomasson in New York at lthomasson@bloomberg.net; Michael Tsang in New York at mtsang1@bloomberg.net.
Posts
No comments:
Post a Comment